Interbank Payments and the Daily Federal Funds Rate

Posted: 17 Jul 2000

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Abstract

Predictable patterns in the level and volatility of interbank payments match those found in the daily federal funds rate. This paper develops a structural model of bank reserve management that rationalizes this finding. Implications of the model are then estimated using a panel of large banking institutions. Simulations based upon these empirical estimates suggest that patterns in payment activity can explain much of the observed intra-maintenance period movement in the federal funds rate around its target. Further, volatility in bank payment flows generates funds rate volatility comparable to what is observed.

Keywords: Federal funds rate, payments, reserve requirements, bank reserves, reserve management

JEL Classification: G21, E52

Suggested Citation

Furfine, Craig, Interbank Payments and the Daily Federal Funds Rate. Available at SSRN: https://ssrn.com/abstract=234690

Craig Furfine (Contact Author)

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

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